Economic and Game Theory
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|"I think this is the beginning of a beautiful friendship." Rick|
Suppose we accept the arguments of those who argue for strong copyright protection for producers. For example, without any ability to license and control downstream usage, a publisher that created a website to distribute unencrypted material could be mirrored. Every time the publisher posts a new work, the mirror could, literally moments later, make the same offering either for free or at a lower price. Having only to pay the publisher for the download, and not having to pay the author for the cost of production, the mirror would seem to have a competitive advantage over the original publisher. We pointed out in our main essay that this need not be all that bad. With limited distributional capacity for both sites, the publisher still might be able to recoup the cost of production; moreover, activities such as offering personalized copies, or simply encrypting the content to slow down the reproduction give the original publisher an advantage that can enable her to recoup costs. Finally, the initial price set by the publisher, which the mirror must pay to go into business, may be itself generate enough profit to recoup the production costs. Depending on how "hot" the work in question is, it may well be possible cover costs and make profits. Still, it is easy to understand why publishers might have nightmares about the mirror scenario, and not implausible that some socially beneficial works might not be produced under such a system.
The difficulty, as we also pointed out, is that even if we allow downstream licensing, it is not that easy to enforce. Take, for example, the DeCSS fiasco. DVDs are encrypted. Through an error on the part of the DVD cartel, the decryption was reverse engineered and the passwords revealed. Although the cartel is attempting to suppress the DeCSS program through legal means, the cat is basically out of the bag. No matter what courts should decide (and so far they have favored the cartel), too many copies of DeCSS exist in the wild. Unless all are identified and destroyed, along with every bit of source code and the knowledge in people's minds of what the password is, DeCSS or an equivalent will continue to be available. Unless all existing DVDs are somehow recalled, every movie so far released on DVD (and any future movie that will play on existing players) can be ripped. The point is, as time goes on and no matter how good the technical means by which material is protected, those technical means are going to be beaten (probably by some curious teenager) and the whole amount of resources spent upon them will lay in waste. At this point enforcement becomes prohibitively expensive. Only draconian and totalitarian methods such as monitoring all internet traffic for content, prosecuting millions of individual users, prohibiting anonymous means of communication, or simply disconnecting the entire internet can realistically prevent distribution. At the moment the movie industry is protected by the fact that even a highly compressed movie requires on the order of 650 Megabytes of storage, which with current bandwidth makes widespread distribution impractical. But bandwidth and compression will improve with time, so this is just a temporary respite.
Notice also, that reverse engineering and secretly distributing material has a cost. Is the ingenuity of hackers well used from a social perspective by reverse engineering decryption schemes designed to protect the monopoly of intermediaries? Most likely not, as "current hackers" are just playing cat and mouse with "former hackers" to code/decode software, in a game that looks a lot like a zero-sum game. Surely this talent could be put to more productive use.
So, if we accept the arguments of the production side protectors, are we doomed to a world either without music, books and videos, or a totalitarian world in which the government, or the RIAA or whoever publishes something has the right to spy on every household for compliance? We think not. Most of the arguments over copyright and Napster have little to do with economic efficiency, as we discuss extensively in the details essay . They are, more simply, arguments over income/wealth distribution. Creative activity generates tremendous surpluses: at relatively low cost, it is possible to create works with enormous social value. To whom should this value belong? The creator without whom the work would not exist, or the user without whom the work would have no value? Much of the current "piracy" rage is driven by producers (not the actual creators, but usually the intermediaries) who demand all the surplus for themselves. These producers (distributors) are very few, large and cartelized. In 1996 the five larger companies controlled more than 70% of the global market for recordable music. Collecting societies, that administrates copyrights in various countries and collect fees, also earn substantial amounts. about 8-9% of the total pie, in fact. In a world where downstream copyright protection was absent or reduced, these "parasitic" intermediaries will be gone, and socially useful resources thereby released. A more reasonable system, therefore, allocating a modest amount of the surplus to the producers would make it relatively easy to cover production costs, and reduce the burden of enforcement. Suppose, for example, the length of copyright protection for downstream licenses was reduced to two years. The typical book spends a year in hardback before being released in paperback, so by the end of the second year, the bulk of profits have been made. In fact material that generates significant profits beyond the second year generates so much profit during the first two years, that production cost (taking account of risk) is easily recouped by then. Indeed, even accepting the producers arguments, a strong case could be made that protection of a year, or even 6 months would suffice to recoup production costs.
How would such a proposal reduce enforcement costs? First, it is much easier to keep something successfully encrypted for two years than for 128. So technical means would have a chance of working. Second, by focusing enforcement on just a small number of recent productions, legal action can be much more effective. Third, the incentive for "piracy" is greatly reduced when the material will be legally available in two years anyway. Fourth, since a two year copyright will reduce the price at which copyrighted material is sold (hard to charge $20 for a CD when it will be available for $1.50 in 6 months), the incentive for users to violate the law is also much reduced. Finally, the moral aspect should not be underestimated. In the software market, people have shown they are willing to pay a modest premium for "legitimate" software. With reasonably priced electronic material, available for free or nearly so in two years time, the enforcement problem should be a reasonable one.
Ultimately the question for producers is: do we try to forge a workable law, or do we tilt at windmills, creating socially wasteful and unenforceable laws that do nothing but undermine confidence in the rule of law? Or perhaps it is not a question for the producers, but for the rest of us.